Facebook is now partnering with HTC to build an Android-based phone — code-named “Buffy” — around its own social operating system platform, as we reported yesterday.

But hasn’t Facebook been working on this phone thing for a long time?

This was the response from many people who track the company and recall the first reports about such a project from TechCrunch and Business Insider last September, as well as the bits and pieces that have cropped up since then.

The answer is complex, as Facebook’s original phone effort was stillborn.

About a year and a half ago, a Facebook mobile special ops team was formed, with its own building separate from the rest of the company. The workspace was accessible by keycard only to people intimately involved in the effort.

This Facebook team was indeed trying to build a phone – really build a phone — much as Apple did, with integrated hardware and software.

But when the project became too big and too political and different from where it started, many of the people involved left the company or went on extended leaves of absence, and the effort was shelved.

But the new effort had its origins in the first — including its code name, Buffy.

The first Facebook phone project was called the “Social Layer,” which was then shortened to “Slayer,” a sly mashup of the phrase.

But that was deemed too violent, and the gentler Buffy was chosen — after the popular television vampire slayer.

The team working on Slayer/Buffy included its leader, Chamath Palihapitiya, as well as Firefox founder and Facebook iPhone app creator Joe Hewitt, Google Chrome OS creator Matt Papakipos, biz dev exec Priti Choksi, developer Zhen Fang and designer Matt Cahill.

This was an exclusive and handpicked group, which generated awkwardness within Facebook’s flat organization.

That’s because Facebook has historically only ever made one product — its social platform. To have a secret team operating out of a separate building drew a lot of interest and also jealousy from other employees, multiple sources said.

The Slayers were working on everything from industrial design to carrier subsidies in order to build the ultimate Facebook phone. They had discussions with potential partners such as AT&T and Intel, sources said.

But, as often happens in ambitious efforts like this, the project quickly spiraled out of Facebook’s expertise and into budgets that were impossible without an IPO or perhaps a billion-dollar fund raising.

With its horizon more limited, those involved — many of them longtime Facebook employees — lost faith amid power struggles and a growing concern that they wouldn’t have the leeway to create something that could truly compete with Apple’s iPhone.

So the team scaled back and looked at building on top of Android. Soon many of them ended up quitting Facebook altogether.

Palihapitiya, for instance, founded his own venture capital firm in June, while Hewitt left Facebook in May to work on his own projects.

Thus the first version of Buffy was slain, until it recently got new life under Facebook CTO Bret Taylor. A source familiar with the older version of the project said the company “undid and then remade” the decision to make an Android-based phone emphasizing HTML5.

A spokesman for Facebook declined to comment on Buffy directly, but told AllThingsD:

“Our mobile strategy is simple: We think every mobile device is better if it is deeply social. We’re working across the entire mobile industry; with operators, hardware manufacturers, OS providers, and application developers to bring powerful social experiences to more people around the world.”

HTC also declined to comment.

But, said multiple sources, that’s where we are today, with an HTC-made Facebook phone being prepared for release in the next year and a half.

Rest in pieces, Slayer.

Related Posts on the Facebook Phone:

1. It’s Finally Real and Its Name Is Buffy
2. Forking Android Offers Both Promise and Pitfalls
3. The “Slayer” That Wasn’t
4. If It Comes, Will It Already Be Too Late?
5. The Facebook Phone: Why Would You Want One?

Full Facebook Phone Coverage »

Please see the disclosure about Facebook in my ethics statement.

Could Google’s Android be Facebook’s new best friend?

It just might be, although it’s unlikely the feeling is mutual.

In making Android open source, Google has given would-be rivals many of the tools they need to offer mobile devices with services that compete directly with those of the search giant.

Once Google releases that version of Android, companies are free to do virtually anything they want with the code. It is this openness that attracted Facebook to Android, even though Google is probably the company’s fiercest rival.

That’s because Facebook, like others, can use Android in ways that compete quite directly with Google, all without paying that company a penny. However, device makers have some tough choices to make when they decide how far they are going to deviate from Google’s proscribed path. Changing the code — known as “forking” — creates both business and technological challenges.

Those that don’t meet certain compatibility and other requirements can’t use Google’s mobile services, for example. In some respects, that’s no big deal, since in many cases Facebook will want to use its services and those of its partners, rather than those from Google. However, it also means that Facebook won’t have access to some things it might want, such as the Android Market for third-party programs.

To the degree Facebook wants other Android apps to run, it will need an alternative, such as Amazon’s App Store, or lesser-known stores such as those offered by companies like Appia and GetJar.

In addition to missing out on Google services, making changes too deeply can mean that apps designed to run on Android won’t work, and that the software will be hard to update once Google comes out with a new version of Android.

For most phone makers, the benefits of following Google’s plan outweigh the opportunity to do deeper customization.

Not everyone is choosing to stick to that path, however. Amazon, for example, uses Android for the Kindle Fire, but has done so in its own way. Others have tweaked Android, too, such as tablet maker Fusion Garage, which has layered its own tiled interface over Android for its recently released Grid 10 tablet.

In the case of the Kindle Fire, some but not all Android apps will run on the tablet device. Amazon has also hidden much of the user interface that is part of the stock Android release, and has put in its own browser, music and video services in place of Google’s.

For Facebook, there is the same kind of opportunity to offer its own services, including messaging.

But customizing Android isn’t necessarily a panacea to make Facebook competitive in the mobile space.

First, social is an important component of the smartphone, but not the only one. Customers also want a phone that can easily access multimedia, download apps and perform other tasks far outside Facebook’s traditional wheelhouse.

As a result, Facebook’s foray into mobile may also mean it needs to either create or partner for many services it doesn’t offer currently, including music and video services.

Still, it is understandable that Facebook might see Android as its most attractive option, even if there are others. Intel has been looking for partners for its mobile Linux efforts, for example, while HP is eager to find a good home for webOS.

However, neither of these come with what Android does — a huge base of consumers and developers already using the operating system.

Related Posts on the Facebook Phone:

1. It’s Finally Real and Its Name Is Buffy
2. Forking Android Offers Both Promise and Pitfalls
3. The “Slayer” That Wasn’t
4. If It Comes, Will It Already Be Too Late?
5. The Facebook Phone: Why Would You Want One?

Full Facebook Phone Coverage »

After years of considering how to best get into the phone business, Facebook has tapped Taiwanese cellphone maker HTC to build a smartphone that has the social network integrated at the core of its being.

Code-named “Buffy,” after the television vampire slayer, the phone is planned to run on a modified version of Android that Facebook has tweaked heavily to deeply integrate its services, as well as to support HTML5 as a platform for applications, according to sources familiar with the project.

Facebook only recently chose HTC, after also considering at least one other potential hardware partner — Korea’s Samsung. That means the products themselves are still a ways from hitting the market, potentially as long as 12 to 18 months.

Although it has changed scope and leadership, Buffy has been an ongoing area of concern at the social networking giant for the past two years. These days, the project is led by Facebook CTO Bret Taylor, several sources said.

A spokesman for Facebook declined to comment on Buffy directly, but told AllThingsD:

“Our mobile strategy is simple: We think every mobile device is better if it is deeply social. We’re working across the entire mobile industry; with operators, hardware manufacturers, OS providers, and application developers to bring powerful social experiences to more people around the world.”

HTC also declined to comment.

Mobile is critical to Facebook’s future. And moving directly into the phone business, while fraught with challenges, may well be essential for the company.

Facebook says it has 350 million active mobile users, and relationships with 475 global mobile operators. Although it is one of the most popular applications on nearly every phone for which it is available, the social network generally plays only a supporting role.

In many cases, Facebook is just an app where people can view their friends’ feeds and upload their own photos and status updates. In other cases, Facebook has worked to take things a step further, allowing users to upload photos directly from the picture-taking app, or to integrate Facebook contacts with the phone’s address book.

But the fight for mobile control is only getting more fierce. Google and Apple run the two major smartphone operating systems, giving Facebook little say over its mobile destiny.

Apple has has fought to maintain strict control over payments within its mobile apps, even if those apps run off of Facebook’s platform, and it also made Twitter its social partner. Google is increasingly a direct competitor, as it is working to promote and integrate its own social network, Google+, across all its products.

The Buffy project represents a significant shift for Facebook, which has focused much of its mobile work on light collaborations with hardware makers looking to create more socially-oriented phones. The partnership with HTC is the latest incarnation of the long-running project, whose twists and turns we’ll detail in an upcoming story in this series.

HTC is one of several companies that have built phones with a dedicated Facebook button, having introduced the Salsa and ChaCha earlier this year. AT&T has sold a version of the ChaCha, dubbed the Status. Others, including Inq Mobile and Motorola, have also developed phones with dedicated Facebook buttons.

And France Telecom’s Orange unit last week announced a series of Facebook-centric phones aimed at emerging markets in Europe and Africa.

With Buffy, though, the integration will go much deeper, bringing friends and social activities deep into the mobile interface.

“Mobile devices are inherently social,” Taylor himself said at an industry conference earlier this year.

That pronouncement has to be awfully tempting for him to turn into reality.

Please see the disclosure about Facebook in Liz’s ethics statement.

Related Posts on the Facebook Phone:

1. It’s Finally Real and Its Name Is Buffy
2. Forking Android Offers Both Promise and Pitfalls
3. The “Slayer” That Wasn’t
4. If It Comes, Will It Already Be Too Late?
5. The Facebook Phone: Why Would You Want One?

Full Facebook Phone Coverage »

Here’s a scorecard:

An Ad Network: This is one that seems obvious to many industry watchers. Facebook has widgets and integrations around the Web, and could easily turn those into revenue-generating opportunities. It could use its social graph to introduce targeted advertising and provide real competition to Google and other ad networks.

But the company has denied repeatedly that it is working on an ad network. Dan Rose, the company’s VP of partnerships and platform marketing, said this week at DLD in Munich, “We get that question a lot, and the answer is always the same: there are no plans for that at this point.”

However, this week Facebook launched a reprise of its failed Beacon product that turns off-site behavior–user “likes”–into “sponsored stories” within its site.

Prognosis: Likely later this year. This would be a good revenue stream to turn on before Facebook goes public, as it says it’s likely to do in 2012.

A Facebook Phone: This one is a rumor mill regular, and it came up again Wednesday with a report that Facebook would launch two phones with HTC at Mobile World Congress this year.

Rose responded at another event in Europe, “This is really just another example of a manufacturer who has taken our public APIs and integrated them into their device in an interesting way….The rumors around there being something more to this HTC device are overblown.” (via Reuters)

But baking Facebook into a phone makes sense. As Facebook CTO Bret Taylor said on Tuesday, “Mobile devices are inherently social.”

Taylor said Facebook wants to take a platform approach to mobile, maximizing accessibility through use of HTML5. But it could be hard to resist demonstrating deep address book integration, instant personalization and other benefits of a Facebook-designed mobile phone.

Prognosis: The denials seem to be a matter of semantics. Facebook is likely to support these projects, and they are coming to market soon.

Payments for Non-virtual Goods: Another major move for Facebook this week was to announce that usage of its Facebook Credits virtual currency would be mandatory starting this summer. It’s a big deal that Facebook will be hooking up credit cards and PayPal accounts for many of the 200 million-plus users who play games every month on its platform.

The obvious next step for Credits is payments for non-virtual goods. But that may not be a viable model given Facebook takes a 30 percent cut of all Credits, which would destroy margins on just about everything but virtual goods. Asked this week at the Inside Social Apps conference whether Facebook would expand Credits to apply to other types of purchases, Deb Liu, the company’s commerce product marketing manager, said no.

“Facebook credits is built as a virtual currency and it’s really built for virtual goods,” she said. Facebook sees Credits as “an opportunity to drive better experience particularly in the games world.”

Still, that doesn’t mean Facebook couldn’t use a similar system to introduce ways for users to pay for digital goods like media within its platform. Margins for digital goods could feasibly swallow a 30 percent cut, as they already do in Apple’s iTunes store.

Prognosis: Facebook’s launch of Credits has been halting and unpopular, in large part because it’s awkward to layer a 30 percent tithing onto its platform after developers have built their businesses. It seems likely to continue to move slowly on payments.

Voice and Video Chat: The Daily What ran a screenshot on Wednesday of a Facebook voice call option appearing on the screen of a user participating in text chat. A company spokesperson didn’t dismiss it as a PhotoShop job, but said, rather, “We don’t comment on rumor and speculation and have nothing to announce at this time,” in response to an emailed inquiry.

As Facebook moves to unify its users’ communications through its Facebook Messages product, adding voice and/or video calls makes sense. And on that front, a Facebook-Skype partnership to fend off Google’s voice products has been in the works for some time.

Prognosis: Soon, given it appears to already be out for user testing.

Autonomous Cars: Not gonna happen.

Why might Facebook start being more audacious and challenging powerful incumbents now? Well, for one thing, there’s no point in trying to stay under the radar anymore.

Throughout its history, Facebook has been somewhat slow-moving and remarkably undiversified, iterating internally on things, such as its “like” button, for years before releasing them to the world, and ramping up revenue at an excruciating pace compared with market expectations.

But the company has done one thing extremely well: User growth. Now that it’s topping out on its potential growth in many markets, Facebook may have to make bolder moves on the product side to increase metrics like engagement. And now that it’s getting ready to face the public markets, it may finally need to prove it can open up the revenue faucets.

Please see the disclosure about Facebook in my ethics statement.

Previous rumors had the company building a phone with INQ Mobile. One of the challenges is that in addition to any true Facebook-designed phones, there are also a whole lot of phones with deep Facebook integration–including plenty of Android devices and the entire Windows Phone 7 product line. So it’s not clear where exactly the line is between a phone with good Facebook connections and a true “Facebook Phone.” However, I’d say if it is blue and bears the Facebook logo, that would count in my book. For its part, HTC declined comment.

So the Facebook phone that the social networking service claims doesn’t exist? It’s being manufactured by INQ Mobile and it will likely be available through AT&T (T) next year in two different models–one with a touchscreen and another with a Qwerty-style keyboard. This according to not one but three people familiar with the matter, who tell Bloomberg the devices will run Android and may–or may not–carry the Facebook brand.

Perhaps this is what CEO Mark Zuckerberg meant by “deep integration.” “Our goal is not to build a phone that competes with the iPhone or anything like that,” he told TechCrunch earlier this week. “For now, I think, everything is going to be shades of integration, rather than starting from the ground up and building a whole system.”

Of course, INQ already peddles handsets with pretty robust Facebook integration–automatic log-in, address book/Facebook contact synchronization, etc.–so these new devices to which Bloomberg refers may well be another variation on that concept and not the “Facebook phone” we’ve heard so much about this week. Certainly, that seems to be Facebook’s position on the matter. And INQ has been selling mass market “social mobile phones” like it since 2008.

“We’ve been working with INQ for a couple of years now to help them build a deeply integrated Facebook experience on their devices,” the company said in a statement. “While we can’t speak for their future product development plans, we can say that our view is that almost all experiences would be better if they were social.”